This Week in Startups - E1142: Emergency Pod! Jason breaks down & ranks his top 4 IPO candidates: Airbnb, Affirm, Robinhood & Roblox!

Episode Date: November 21, 2020

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It's an emergency podcast, everybody. It's an emergency podcast. IPO insanity has hit Silicon Valley with a firm, Roblox, Airbnb, all filing to IPO within four days of each other. And yum, yum for J-Cal, Robin Hood, which I was an angel investor in, is reportedly on the way. I don't have any inside information. On today's emergency pod, we're going to break down and rank, we're going to rank them.

We're going to rank each of these companies by which, One, we'll appreciate the most in the next 10 years. So get ready to place your bets, everybody. Max Levchins, the firm had $509 million in revenue in 2020. Airbnb filed on November 16th. They had Q3 revenue of $1.3 billion. So it times that by four, you're at about a $5 billion run rate. And Roblox filed on November 19th.

They had $242 million in Q3 revenue. It times that by four, you're at about a billion dollar run rate. And, ooh, yum, yum, Robin Hood has not yet filed. But folks are speculating that they're closing in on a billion in yearly revenue with 15 million users. It's an emergency podcast. Brace for Impact, everybody. This emergency podcast is brought to you by my friends at DigitalOceans App platform. A new platform as a service solution for modern cloud native apps.

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All right, everybody, it's really exciting here in Silicon Valley. We have four companies. that are in the IPO window. This is a critical moment of importance for these companies because when you become publicly traded, a whole new class of investors gets to join the cap table and the people who've been on the cap table for a long time. Angel investors, employees, venture capitalists, and partners get to have liquidity.

It means they basically get to sell their shares after typically a decade of building the company. So congratulations to those founders or those employees and partners and investors, of course, be careful because many times the appreciation of a company after an IPO is greater than before when it's growing. And that last double up, triple up can mean all the difference in the world when it comes to creating generational or significant wealth. Just as an example, I was lucky enough to be in one of the venture capital funds that was in Square, which went public five years ago yesterday.

It opened out 11 bucks a share after being priced at 9. Today, the stock briefly hit $200 a share before settling in around $195. They added this cash app. It has made the business just absolutely surge. But that's almost a 20x return in the five years after it IPOed. So just, wow, that is incredible. And when we look at these four companies, there is something very important to note about them. they are all beneficiaries of the pandemic.

I know it sounds crazy. I know it sounds like I'm a crazy rabid capitalist, but every crisis has winners and losers. And as they say, it's pretty cynical, you never want to squander a crisis. And if you look at a company like Roblox, if you don't know Roblox, you probably don't have kids, ROB, LOX, it's another one of these free-to-play games.

People might consider them similar to Minecraft or in that category. And users create an avatar and they can move from game to game. We've never had David, the CEO on the pod as a guest, but we'll get that done. It was founded in 2006. So this has been a 14-year journey. Their last round, 150 million, it was a series G at a $4 billion valuation in February early this year, right before we shut everything down and people kind of knew about the pandemic.

So investors have large amounts of money. And when there's a crisis, they want their winners to have large war chests of capital. So this is really interesting when you think about each of these IPOs had to think about a strategy to get through the pandemic, which was a once in a hundred year, at least, you know, historically tragedy and crisis. So this is going to be one of these incredible business lessons for decades to come as to which companies made it through the pandemic and which ones in fact soared through it. As we said earlier, they're at that quarter million, quarter billion dollars. I can't believe we're saying quarter billion dollars. It's amazing. 242 million dollars up from, up 93% that

Q3 revenue from 2019 to 2020 with a loss of 200 million across the first three quarters. So they're losing something like 300 million a year. That is not uncommon for these companies to be losing money. A lot of people get obsessed with this in the stock market or in the press because the press is not on the other side of the investor table. I started my career in the press. Shout out CyberServe for Silicon All right. And when I was reporting on stories, I had five to 10% of the information. And the best journalists out there have 25% of the information. The other 75% to 95% journalists are just guessing.

That's why you listen to this podcast because I'm an insider. I can tell you the straight dope. And the straight dope is this is a great company. Congratulations to the investors. However, there is a challenge with this business. And there's a reason why I'm going to pick them as fourth place in today's four horse race. This is the one I would be least likely to bet on. This does not mean it's not a great company. This does not mean it's not going to appreciate value. I'm ranking these because it's

forcing me to think just and make decisions here, which is what I do for a living. Investors make decisions for a living, just like gamblers make decisions for a living. And when I look at the revenue ramp here, it's impressive, of course. When you look at the product, it's impressive, of course. However, even though it's an attractive customer. company. This is not a marketplace. What's a marketplace? Uber and Airbnb are marketplaces. It's not a fintech company like a Robin Hood or wealth front or PayPal or square. Those companies have massive margins in some cases. They're really scalable. Let's face it, this is like a game. They get their money from an in-game currency. Those get purchased or they have

subscriptions in some cases, but games tend to last a decade or two. They're franchises. You really probably could look at this and you have to have a debate in your head. Are we buying Marvel, which was, I believe, a public company before it was owned by Disney or are you buying Disney? In this case, you're buying a singular title. And that makes me nervous. It makes me nervous. It's a risk factor. What if this falls out of fashion? What if the next big thing? I would love to see something like Roblox when they become public merge with Clash of Clans and other games or Zinga and you put together 10 franchises just like Disney is. Who will be the Bob Eiger of this space is what I want to know.

Who's going to have the Hootspah and the delicate ability to bring together disparate companies and make them into one giant one? I don't know if that's Roblox because I have never met the founder. I don't know if he's a dealmaker or not. I don't know if he's Eisner. I don't know if he's Ovitz or is he Bob Iger, the dealmaker of all dealmakers, at least being able to buy Marvel, Pixar, and Star Wars. I mean, the greatest three pickups ever.

So I think it's a great company, but I'm giving it fourth place. Let's go on to my number three. Affirm is my number three. I think you guys know what they do. It's kind of like a layaway plan. You can pay in installments for something. Brilliant idea. This idea has been around for a long time, but you put one of the PayPal Mafia guys behind an obvious idea and they execute at a high level. Well, that's Max Lefchin. He was on episode 794 back in 2018 talking about a firm and it's obviously a brilliant idea. They too did a series G. for 500 million at an undisclosed valuation in September of 2020, according to the research we have, which tends to come from Pitchbook, which is a great product. 2020 revenue 500 million, up almost 100%, 93% from 2019. And that's what you see typically with these smaller footprint companies, they're growing maybe 80, 90, 100%.

That's high growth. Then you have this sort of medium growth, you know, when you have a big base, 30, 40% year of a year. and then you have the 5 to 10% growth. And there are outliers, obviously, like Amazon and others, that can have incredible growth on big numbers. But typically as the number gets bigger, it's harder to make that percentage growth go up. So you get a premium on your valuation.

When you have high growth, that's a small company. You have a discount when you're low growth on small companies. And when you have high growth on a high number, you're Amazon. Okay, I think we all understand that. this is an interesting one because a lot of people have pointed out a red flag and a firm. I don't consider this a red flag. I consider this just an alarm like my do of my siren. Like, oh my lord, there is a major company out there that is 28% of a firm's revenue for 2020, according to research.

And that is Peloton. Now, people are like, oh my God, this is a risk factor. It would be listed in the risk factors in the S1. read these S-1s anymore because, God, I invest in the companies, you know, before they even have a cat table. So reading the S-1s to me is like reading somebody writing about a movie 20 years after it was made and I was sitting with, you know, the script writer at the table read, right? Like, that's where I live. I live at the table read for Jurassic Park or for Goodfellas. You know, there are people who write about Goodfellas 20 years later and its meaning in the world. It's two different jobs. But what I can tell you,

is that when a company gets a blue chip company like Peloton, that's something special. Of course, it's going to be a disproportionate amount of their revenue. Of course that's going to happen. But that's a sign that they know how to close a huge, important, growing client. Now, while a firm and layaway programs might not specifically be driven by a pandemic, we all know that Peloton's valuation has soared unbelievably. I think they have, you know, somewhere between one and two million members now because you have the people who just buy the software and yet the people who've bought the bikes and the treadmills. I think there's four more products coming from our friends at Peloton. I don't have inside information. Even if I did, I wouldn't call it inside

information as a public companies. I don't own Peloton stock. I may own some, actually, I might own some Peloton in the Vanguard funds and those mutual funds I own. I don't even know what's inside of them. But put it this way. I would not be surprised if a company like Peloton had an elliptical machine, a rowing machine, a strength training machine, and some other similar type offerings. They already have yoga and hit classes built into the app. So how many millions of subscribers do they have?

I think, you know, last I checked, it was well over a million. But the company was valued at such a high premium that I think they either. represent a $20,000 or $30,000 or $30,000 lifetime value. So Peloton is just got as much of this pandemic wind in itself, as gruesome as that sounds, as it could possibly have. And that is why a firm also is benefiting. So the first two companies, you're at home, your kids are doing virtual school, they're not doing virtual school, they're playing video games, they're goofing off. that's the sad truth of all this, and they got plenty of time at home, they can't leave. At a firm as well is having a massive push, a massive push from a firm because they have landed Peloton.

There will be many, many more companies, and I wouldn't be surprised someday if a company like a firm was selling used cars like Teslas or something. that when you get good at assessing the risk of a customer who wants to be on a layaway plan and you become a trusted brand, you might have many people who are doing a firm type services that who you didn't expect, right, vacations, etc. So it's just the ideal customer profile. You think about a Peloton customer. I mean, this is an expensive customer good. It's a considered purchase.

It's not considered to the level of a level of, a home, a marriage, or a car. You know, obviously those are the big three for people, but it's kind of a Peloton's kind of similar in price in terms of consideration as a vacation. Like you're yearly or you're like every two year vacation. You know, that three, four, five thousand dollar vacation that you really got to think about, not for kids, but for adults when they, you know, go as a couple or a family and they're spending that five, 10 grand going somewhere. That's what I think, you know, is really at work here. And I would not. ever in my life bet against almost anybody in the PayPal Mafia, let alone a genius like Max

Levchen. He's probably capable. I don't have insider information here. I know that Peter Thiel got beat at chess by David Sacks in a multi-chess game. I think Max Levchen. I bet you he's beaten Peter Thiel as well. So that gives affirm my number three position, even though they less revenue. I think 10 years from now, a firm will be worth more than Roblox. Now, it's going to be very, very hard to do these next two because I believe the next two companies have a chance, and I know this sounds crazy here. We're sitting here and these companies are worth tens of billions. I think these are trillion-dollar companies. I think these are companies that we will look at in a decade like we look at Facebook, Google, Amazon, and Apple.

These are the next generation of trillion-dollar companies. I am, in fact, certain of that myself. If I could only put my money into 20 companies in the market, both of these companies would be in those 20, because they are so loved and transformative. And I can tell you they share something in addition to having the pandemic, driving them, right? People did not want to stay in hotels because hotels have elevators,

elevators contain coronavirus and staying in a single family home or a small apartment complex or a townhome, that is much safer, much safer than staying in a hotel. And people are doing staycations and they want to do extended stay because they wanted to leave cities where the coronavirus was like New York or maybe Los Angeles and they wanted to go to the country. So, Airbnb panicked when, I mean, they were terrified and rightfully so. Brian Chesky is a brilliant founder. I've been trying to get him on the pod for a decade. I don't think he likes me for some reason. I'm not sure why. I keep asking him. He keeps saying no. I don't know if it's personal or not, but the invitation's there anytime. I'd love to tell the

story of Airbnb on the pod. But putting that aside, this is a juggernaut of a business. and this had to be hard because Brian is just clearly one of those guys who, you know, entrepreneurs who has all their emotions right on their sleeve. They had to lay off. Did they do a third of the staff, I think, 25% of the staff? It was they gutted the joint and they had massive layoffs. And then they found out they probably didn't need to cut that many people, but they cut all of these high and expensive employees. And they treated them financially. nominally on the way out, gave them huge exit packages. But here you go. They make these massive cuts and then revenue bounces back. I heard from many people, Q3 was looking like this juggernaut of

a quarter. And in fact, according to all reports, they are crushing it. Bounce back in revenue from Q2 of 2020 to Q3. They went from $335 million to $1.3. It is just insane. how lucky they got in this series of events. And a lot of times in business, luck is involved. And you set yourself up for luck by taking action. They took quick action. They were conservative. They cut all these expensive positions to be conservative.

They cut all these extra projects they were doing. There's been talk about Brian wants to do an airline. Maybe they want to buy hotels. Maybe they want to start building their own buildings. This is an ambitious company. and those projects will come back in the future. Congrats to my team, my squad at Sequoia. Congratulations to Sequoia for being the largest shareholders outside of the founders.

They got 13% of this. You know, and Andreessen Harwood's going around, like, championing themselves as this incredible firm with their little 3% of Airbnb. I mean, that just tells you everything you need to know. They're banging the drum A16Z like they built Airbnb. Like one quarter. I mean, when people talk about why does Andresen Horowitz have bad returns, the information was talking about, oh, leaked stuff, here's how bad their returns are. I mean, A16Z had less than Founders Fund, less than Greylock, and not even, you know, it's apparently not even a quarter of what Sequoia had.

So sometimes you have people who make a lot of noise in the valley, Mark Adreson, Ben Horowitz, and they, you know, oh, my God, they're the big investors in Airbnb. be. But maybe they're just making a lot of noise and the empty can makes the most noise. Sequoia, boom, 13% of this. Oh, my lord, yum, yum. This is going to be an unbelievable return for Sequoia Capital and obviously the founders. And you never hear a peep from Sequoia. You know, that's how you know the winners. You know, Michael Jordan, you know, he might take things personally, whatever, but, you know, he's not like dunking the ball and then screaming. and yelling when he's down 50 points. Like, that's kind of the Andresen Horowitz move.

Now, here comes Robin Hood. I was lucky enough to be an angel investor in the firm before they launched. Vlad has been on the pod episode 736 back in 2017. He's spoken out of events. And now you start thinking about what happened during the pandemic. Well, no sports, no gambling. When he pitched me Robin Hood, he pitched me Robin Hood as a platform for millennials to get involved in investing and educate themselves on investing for their futures.

And I said, but millennials are still on their parents' Netflix accounts, and they don't even have like, they don't want to sign leases. And they just seem to be the least of all the generations to go after. Like, my gosh, like, why would you go after this group? Like, they're seriously commitmentphobic. They don't get married. They don't buy homes. You know, they just seem to be a little bit flighty.

and they got a lot of feelings, and they stay at jobs for six months, and they don't have a problem with that. And you know what? I give millennials a lot of credit for actually prioritizing the here and now and being present, but I didn't think that millennials and all these people would say, you know what, I should download an app and maybe learn how to trade. Well, a couple of things happened during the pandemic. People couldn't bet on sports because sports wasn't happening. So some of that energy, according to reports. I don't have any inside information. Honestly, I don't. Went to maybe people saying, I want to gamble on stocks. Maybe I want to buy some Apple at Uber. Maybe I want to buy Airbnb when it finally goes public. So they are not filed yet,

but Vlad is now the official CEO, not co-CEOs. That's a sign that they're dialing it in. About 40 to 55 percent of their revenues, according to sources. This is not from my information. I don't have actually the information. I'm such a small investor that I don't have the details because I don't have information rights. As a small investor in a company, I'm not on the board either. But in Q2, maybe $200, $180 million, which is 40 to 55% of the total revenue. You know, wouldn't be surprised if they are between 15 and 20 million user accounts.

And they added, according to sources, 3 million new users from January to May in the year of 2020, the great year of the pandemic. The median age of Robin Hood users is just 31 years old. So let's pause on that. Let's pause on that for a second. The average age is 31 years old. That means that these Robin Hood users, when you bet on Robin Hood, you're betting on a group of people who are going to double their net worth every number of years, five years, 10 years. These are the people who are smart. They're educated. They are going to have massive amounts of discretionary income. Robin Hood could be a bank. Robin Hood could do mortgages. Robin Hood could buy other companies. I think Robin Hood becomes a brand that just becomes the bank, trading, savings, everything of

the future. I think literally, you know, the sky is the limit. There could be absolutely hundreds of millions of members for Robin Hood. Now, I am talking my own book because I own shares in Robin Hood. It's going to return if things go according to plan. It will probably return the entirety of my first fund, perhaps at a multiple. And that's what you're looking for as an investor. So which one of these two companies would be the better investment for the next decade. This is a hard one because both of these companies fit into a model I call startups that induce a market. In other words, they are so compelling in their product design. They're so good at what they do. They have such amazing brands with such amazing products. They induce a market. In other words, they, by their existence,

get people to do an activity. This happens very rarely. Uber and Postmates got people to order food and lift and to take more rides. Airbnb got people to take more vacations and longer vacations and staycations. And Robin Hood got more people to trade stocks more often because they made it free. Airbnb did it because they made it super cheap because you could have eight people staying in an Airbnb instead of having four hotel rooms. And the eight purse, the four bedroom Airbnb cost what two hotel rooms cost and a

at a kitchen so you saved all that money on room service. You get the idea. These are just two transformational products. I believe Robin Hood will be worth more, have more value a decade from now. Now, of course, I'm talking my book. I'm sure an Airbnb person would pick Airbnb if they were on that cap table. So take it for what it's worth. I think it's what they call in the sports world a pick them. You can flip a coin, you can pick either one. It could be the difference between owning you know, a Google and a Facebook or an Amazon and Apple. In other words, you would be thrilled to own either one of these companies. I do not give investment advice, but oh my lord, to watch these two companies over the last, you know, seven to 10 years grow at this pace and change the world

has been extraordinary. So there's your order, folks. Robin Hood, which has not yet filed. we think it's going to be soon? Most people think in the next couple of months. Number one, Robin Hood, number two, Airbnb. Number three, affirm. Number four, Roblox. No offense to Roblox. But I do think if I was running Roblox, I would start thinking, and I would read Ride of a Lifetime by Michael Eisner. I'm sorry, I would read Ride of a Lifetime by Bob Eager, who is the opposite of Michael Eisner. Bob Eiger got the deals closed. Michael Eisner fought against buying Pixar. So that tells you everything you need to know about just the difference in how they thought. So congratulations to all the shareholders these companies, especially Sequoia, which, by the way, is in Robin Hood.

And they're also in Airbnb. I know that for a fact. I don't know if they're in a firm. I know they know Max Levchen because Ruloff is part of the PayPal Mafia, but maybe they missed it. Maybe they have a small stake in it. Who knows? But that's the order. This has been an amazing emergency.

emergency podcast for an insane three-week S-1 IPO following here in Silicon Valley. Thanks for tuning in to an emergency pod. We'll see you all next time. Bye-bye. This week in startups is brought to you by DigitalOceans App Platform, a new platform-as-a-service solution to build modern cloud-native apps. With app platform, you can build, deploy, and scale. scale apps and static websites quickly and easily. Get started for free at DO.co.co.

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